1. Ingram Inc. carries an average inventory of $1,125,000. Its annual sales are $15 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $970,890 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

2.

Brau Auto is trying to determine its optimal capital structure. The companys capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:

	Percent financed with debt (wd)		Percent financed with equity (wc)		Debt-to-equity ratio (D/S)		Bond rating		Before-tax cost of debt
	0.10		0.90		0.10/0.90 = 0.11		AAA		7.0%
	0.20		0.80		0.20/0.80 = 0.25		AA		7.2
	0.30		0.70		0.30/0.70 = 0.43		A		8.0
	0.40		0.60		0.40/0.60 = 0.67		BBB		8.8
	0.50		0.50		0.50/0.50 = 1.00		BB		9.6

The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. Aaron estimates that if it had no debt its beta would be 1.0. (Its unlevered beta, bU, equals 1.0.) The companys tax rate, T, is 40%.

On the basis of this information, what is the companys optimal capital structure, and what is the firms cost of capital at this optimal capital structure? 3. Madura Auto, a national auto parts chain, is considering purchasing a smaller chain, South Illinois Parts (SIP). Madura 's analysts project that the merger will result in the following incremental free cash flows, tax shields, and horizon values: Year 1 2 3 4 Free cash flow $1.5 $4.5 $4.5 $10.5 Unlevered horizon value 112.5 Tax shield 1.5 1.5 3 4.5 Horizon value of tax shield 48 Assume that all cash flows occur at the end of the year. SIP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SIP would retain its current $22.5 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SIP's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of SIP to Madura ?